Average labour productivity dynamics over the business cycle

An unobserved components model is used to analyse the cyclicality of average labour productivity in Australia since 1980. The model includes a direct estimate of phase shift so that the lead or lag of cycles relative to output can be determined. Average labour productivity is found to be countercyclical with output and employment and lagging the cycle in output by about six quarters. The observations are consistent with a theoretical model in which employment adjustment costs are falling due to lower turnover in employment. A more flexible labour market allows greater variation in employment relative to variation in output which tends to make productivity more countercyclical. The model is also used to determine the relative importance of the intensive and extensive margins of labour supply by examining fluctuations in both employment rates and average hours per worker. The full-time employment rate is significantly procyclical and lagging output as expected. The part-time employment rate is countercyclical, suggesting that there is some substitution of part time for full-time workers during economic downturns. At the intensive margin, average hours are procyclical, but they make a smaller contribution to the cyclicality of productivity than the employment rate.